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Economy in U.S. choked by sputtering business spending

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(Bloomberg) — The world’s largest economy sputtered to a near-halt in the first quarter, choked by a slump in U.S. business investment and exports that dimmed hopes for a meaningful short-term rebound.

Gross domestic product rose at a 0.2 percent annualized rate after advancing 2.2 percent the prior quarter, Commerce Department data showed Wednesday in Washington.

The figures come as Federal Reserve policy makers meet, and the weaker-than-forecast reading signals officials will be in no rush to raise interest rates. While the economy is likely to bounce back from the temporary restraints of harsh winter weather and delays at West Coast ports, the harm caused by the plunge in fuel prices and stronger dollar will probably prove longer-lasting.

“There’s not a whole lot of momentum heading into the second quarter,” said Mike Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “We expect the economy to be better, but some of the details in this report are cautionary.”

Stocks fell as investors awaited the Fed’s statement. The Standard & Poor’s 500 Index declined 0.6 percent to 2,102.14 at 12:12 p.m. in New York.

The median forecast of 86 economists surveyed by Bloomberg projected GDP would rise 1 percent. Forecasts ranged from little change to a 1.5 percent gain. It was the weakest performance since the first three months of last year, when bad weather also damped growth.

Business investment

Corporate fixed investment decreased at a 2.5 percent annualized pace in the first quarter, the biggest decline since the end of 2009. Spending on nonresidential structures, including office buildings and factories, dropped 23.1 percent, the most in four years.

The decline reflected weakness in petroleum exploration as oil companies slashed budgets on the heels of plunging crude prices. Spending on wells and mines fell at a 48.7 percent annualized rate in the first three months of the year, the biggest drop since the second quarter of 2009, when the economy was still in the recession.

Halliburton Co., the world’s second-biggest provider of oilfield services, has said it expects to reduce capital spending by 15 percent this year and accelerated the pace of job cuts ahead of its takeover of Baker Hughes Inc.

Not all aspects of business investment were weak. Outlays on research and development climbed at a 12.3 percent pace following a 17.2 percent advance at the end of last year that marked the strongest back-to-back quarters since 1960.

Trade gap

Trade also hindered the economy last quarter, subtracting 1.25 percentage points from growth, according to the Commerce Department’s GDP report. The dollar’s more than 20 percent advance since the end of June and uneven overseas growth contributed to a drop in exports. The trade deficit swelled to an annualized $522.1 billion rate from $471.4 billion.

Housing shows signs of firming. Home-building managed to eke out a gain last quarter even with the harsh weather, according to Wednesday’s report.

The number of Americans who signed contracts to buy previously owned homes climbed in March, according to figures from the National Association of Realtors also issued on Wednesday. Pending sales are considered a leading indicator because they track new purchase contracts. Existing-home sales are tabulated when a contract closes, usually a month or two later.

Consumer rebound

Consumer spending, the biggest part of the economy, rose 1.9 percent, exceeding the 1.7 percent gain median forecast of economists surveyed by Bloomberg. While that is down from a 4.4 percent advance in the prior quarter that was the strongest since 2006, purchases were probably held back by the harsh winter weather. That points to a rebound as temperatures warm and employment and income pick up.

“There’s a good case to be made for a fairly solid rebound in consumer spending in the second quarter,” said Michael Carey, chief economist for North America at Credit Agricole CIB in New York, who accurately forecast the gain in household spending. “Low gasoline prices are a positive. The labor market continues to improve, and that will eventually lead to an increase in wages.”

Disposable income adjusted for inflation climbed at a 6.2 percent annualized rate in the first quarter, the most in more than two years, according to the Commerce Department’s data.

Because the gain in earnings exceeded the increase in purchases, the saving rate climbed to 5.5 percent, the highest since the end of 2012, from 4.6 percent in the fourth quarter. That signals households have plenty of buying power that could be unleashed in coming months.

Little inflation

The GDP report also showed price pressures remain limited. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 0.9 percent annualized pace, the smallest gain since the end of 2010.

JPMorgan’s Feroli is among economists who are less optimistic about growth this quarter following the weak data over the past few weeks. He and his colleagues lowered their second-quarter GDP forecast to 2.5 percent last week from 3 percent.

The Fed’s long-awaited liftoff on its benchmark interest rate won’t happen until September, according to economists surveyed by Bloomberg, as officials try to spur inflation and hiring after the economy stumbled in the first quarter. Policy makers are due to release a statement later in the day.

“The Fed will be in wait-and-see mode,” said Feroli.

–With assistance from Chris Middleton in Washington.

To contact the reporter on this story: Shobhana Chandra in Washington [email protected] To contact the editor responsible for this story: Carlos Torres at [email protected] Vince Golle